Grid-pricing systems have become part of the normal routine for feeders marketing fed cattle. By offering premiums for beef-carcass attributes and discounts for other traits, they've become useful and popular valuation methods. But, as grid pricing evolves, some adjustments to the systems used to value cattle may be in order.
Several Midwest agricultural economists have studied grids and are beginning to make suggestions that may help couple grid pricing more closely to end-product value.
“Cattle feeders have learned how to manage and market fed cattle to increase the probabilities of obtaining premiums and reduce the likelihood of discounts,” says Ted Schroeder, professor of agricultural economics, Kansas State University (KSU). “These pricing systems are designed to send clearer signals to producers regarding the value of meat in a carcass.”
Besides being an evaluation tool, he says a key component of grid pricing is the information flow to producers to help signal what processors want.
“Despite apparent benefits to grid pricing, there is considerable room for improving several aspects of grid-pricing systems,” Schroeder says. “Concerns are present regarding methods used to establish base prices, grid premium and discount structures, and techniques used to measure carcass quality.”
Most base prices are tied to formulas applied to an external reference price, such as the local cash fed-cattle market or adjusted-plant-average price.
Although easy to use and understand, this base-price-determination method suffers from several drawbacks, explains KSU economist Jim Mintert.
These drawbacks relate to:
diminishing cash trade volume,
possible opportunity for a packer to manipulate the external price used to establish the base price, and
how representative such markets are for the uniform, higher quality cattle typically sold via a grid.
Other external reference prices also can be employed to establish base prices. They include:
- live cattle futures,
- retail prices, or
- base prices that can simply be negotiated.
“Each approach has benefits and drawbacks,” Mintert adds. “Presently, a formula that establishes base prices using the wholesale boxed-beef price (plus by-product value) appears to offer the most potential.”
However, he says, variability in the farm-to-wholesale marketing margin over time markedly affects the relationship between wholesale and farm-level prices. This must be carefully considered if wholesale boxed-beef price is used to establish base prices.
Signaling To Producers
Grid premiums and discounts send strong signals to producers regarding carcass attributes processors desire.
Clem Ward says current grids tend to have lumpy and discrete premium/discount schedules. Ward is an Oklahoma State University agricultural economist.
“Small changes in particular carcass attributes result in substantial price changes that can exceed value differences,” Ward says. “Further, the subjective way carcass attributes are measured leaves room for small errors in quality assessment that also can result in large errors in carcass valuation.”
Thus, more continuous premium/discount schedules, and more objective continuous carcass quality measures, need to be developed.
Objective Meat Measurements
In order to get more accurate assessments of carcass value, more objective and precise measures of carcass quality attributes closely related to consumer preferences are needed, says Tommy Wheeler. He's research food technologist, USDA Meat Animal Research Center, Clay Center, NE.
“The industry needs to continue developing more objective, accurate and continuous measures of meat quality and yield that are directly related to end-product value,” he says. “Image analysis appears to offer the most promise for predicting red-meat yield.”
Current technology for measuring tenderness suffers from a tradeoff between accuracy — shear force is most accurate — and invasiveness.
“Measuring tenderness with an objective, noninvasive, tamper-proof, accurate and robust technology is the ideal,” Wheeler says.
For a copy of the complete report released in December 2003 by Ted C. Schroeder et al., “Fed-Cattle Grid-Pricing Valuation: Recommendations for Improvement,” contact KSU at www.oznet.ksu.edu and request bulletin MF-2637.
Finding Profits In Grids
A new tool to help producers compare, analyze and simplify quality-grid marketing decisions, as well as identify additional marketing opportunities, is introduced by Cattle-Fax.
Grid-Max is an Internet-based program that allows producers to directly compare how their cattle will perform on several packers' public grids. Users can input their cattle, make direct comparisons between public grids and see the net return of each individual animal at specific plants during specific weeks.
With a full year's data, the program not only assists in weekly marketing decisions but can be extremely valuable tool in benchmarking cattle performance relative to numerous public grids offered by today's packers.
Randy Blach, executive vice president of Cattle-Fax, says Grid-Max has applications for every production segment from cow-calf producers to cattle feeders. Most of all, he says, it allows beef producers — without assuming any financial risk — to make accurate historical and weekly grid comparisons based on net returns.
“Grid-Max is one of the most effective methods of price discovery and base-price arbitrage currently available to producers,” says Nevil Speer, associate professor of animal science at Western Kentucky University.“It serves to empower beef producers by facilitating delivery within an available network that provides maximum profit opportunity.”
Market assessments in the program include updates on base prices, premiums, discounts and specifications while allowing producers to account for contingency factors such as freight costs, performance expectations and delivery date within the framework of specific grid-pricing components. The net result allows cattlemen to evaluate a variety of existing grids on a weekly basis, prior to any marketing commitment. On a broad scale, cattle and management attributes now can be strategically matched with appropriate grid alternatives.
For more information regarding Grid-Max, contact Bill Chandler or Mike Miller at Cattle-Fax. Call 800/825-7525 or e-mail firstname.lastname@example.org or email@example.com. The Grid-Max Web site is available through the Cattle-Fax home page or at www.grid-max.net.
— Clint Peck
Some Recommendations for Improving Grid Pricing
Following are some recommendations for improving the use of grid pricing in the fed beef cattle trade:
Methods used to determine base price are problematic and trade-offs associated with use of various methods need to be assessed.
Grid-price schedules tend to be discrete and lumpy with sizable premiums or discounts for sometimes-minor differences in actual carcass values.
Current grid-pricing systems suffer from subjective measurement of quality and poor correlation with consumer preferences.
By 2006, grid-based sales are expected to increase to nearly two-thirds of fed-cattle sales.
78% of fed cattle sold on a grid used local cash, fed-cattle markets or adjusted-plant-average prices to establish base prices. Although easy to use, this method of establishing base price is not recommended.
Using local cash or plant average prices to set base price is not recommended because these markets represent lower quality cattle and might be influenced by a small number of transactions.
Using live cattle futures market as a base price, however, also has problems as basis varies substantially over time.
Negotiating base price engages both parties in price discovery, but it is difficult to have negotiating leverage for a base price if cattle are destined for a grid with one particular packer.
Packers and producers both have incentives for the boxed-beef price to be high.
Using boxed-beef price to establish a base price is preferred, but the challenge is dealing with a volatile farm-to-wholesale margin.
We advocate tying base prices to wholesale-beef prices.
Research indicates current quality grades do not predict eating satisfaction effectively.
Subjective measures of quality mean that big differences in carcass value are sometimes attributable to measurement error.
Given poor correlation between eating experience and quality grades, a lower-priced Select carcass could actually produce more desirable meat than a higher-priced Choice carcass.
The overall economic efficiency of a step-wise discount structure is questionable.
USDA Select and Low Choice carcasses would be logical candidates for increased value by identifying those that are tender.
The direct method to predict meat tenderness, slice shear force, is significantly more accurate than currently available non-invasive methods.
A non-invasive, objective, accurate and low-cost measure of beef tenderness needs to be developed.
Image analysis shows promise for objectively measuring marbling and lean color.
Carcass valuation methods need to be based on objective measures of red meat yield and quality attributes important to consumers.
The report: “Fed-Cattle Grid-Pricing Valuation: Recommendations for Improvement,” by Ted C. Schroeder et al., was supported by the Livestock and Meat Industry Council, American Farm Bureau Federation and Kansas State University Agricultural Experiment Station and Cooperative Extension Service.